4
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CHAPTER

Cost Management Systems and Activity-Based
Costing
OVERVIEW
The focus of this chapter is on how costs are classified, accumulated, and assigned to products, services, and periods. A key concept to learn from this chapter is that although classifications of costs are somewhat arbitrary, the goal of managerial cost systems is to identify and measure all the costs of activities and products and services that generate revenue. After reading this chapter you should be able to: I.

Describe the purposes of cost management systems.

II.

Explain the relationship among cost, cost object, cost accumulation, and cost assignment.

III.

Distinguish among direct and indirect costs.

IV.

Explain the major reasons for allocating costs.

V.
Identify the main types of manufacturing costs: direst materials, direct labor, and indirect production costs.
VI.
Explain how the financial statements of merchandisers and manufacturers differ because of the types of goods they sell.
VII. Understand the main differences between traditional and activity-based costing (ABC) systems and why ABC systems provide value to managers.
VIII. Use activity-based mamagement (ABM) to make strategic and operational control decisions.
IX.

Describe the steps in designing an activity-based costing system (Appendix 4).

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49

REVIEW OF KEY CONCEPTS
I.
A.

Describe the purposes of cost management systems.
Cost systems that are designed primarily to aid management decision making (rather than financial reporting) are called cost management systems (CMS).
1.

A cost management system combines cost behavior and decision-making information needs to analyze the costs of cost objects.
a. Cost management systems rely heavily on activity analysis and ABC (see below).
b. As discussed in Chapter 1, management accounting serves decision makers best when cost management systems are parallel to the decision-making process.

2.

B.

II.
A.

In many organizations, however, the cost system must serve both decision-making needs and financial reporting requirements. Note that these may not be compatible, and some firms have multiple cost systems—one for financial reporting and one for decision making. Cost management systems must be consistent with the organization’s strategy by providing planning and scorekeeping information relevant to the organization’s goals and objectives (see
Chapter 9 for detailed discussions).

Explain the relationship among cost, cost object, accumulation, and cost assignment. Any cost accounting system, which measures costs for decision making and financial reporting, has two main elements:
1.

The accumulation of initial costs by such natural classes as material or labor.

2.

The cost assignment (also called cost allocation or attribution) of these costs to cost objectives; for example, to
a.

Evaluate the performance of organizational departments.

b.

Compute costs of outputs (end products and services produced for customers).
Stop and Review
See textbook Exhibit 4-1

B.

Understanding cost management systems requires first understanding some basic cost terms and relationships: 1.

Cost is the monetary measurement of an exchange of resources for a particular purpose; for example, the dollars paid for printing presses or for typesetting labor by a newspaper publisher. Cost is a measure of the acquisition value of something—e.g., what you paid for it. This number is not always obvious for many items.

2.

Cost object (or cost objective) is any activity for which decision makers need a separate measurement of costs; for example, the cost of operating the credit department or the cost of manufacturing pocket calculators.

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50

III.
A.

Distinguish